Canadian Dollar Goes From Loss To Gain On Reserve Status

By Ari Altstedter -
Dec 29, 2012

The Canadian dollar recouped last
year’s losses as the growing perception of the currency as a
reserve asset bolstered demand among global investors even as
the nation’s commodity-led economic boom slowed.

The currency has gained 2.4 percent this year versus its
U.S. counterpart, after losing 2.3 percent in 2011. The
International Monetary Fund said last month that the relatively
high number of central banks buying the so-called loonie and
Australian dollar indicates they should be added to a category
that includes the U.S. dollar and yen. Statistics Canada is
forecast to show on Jan. 4 that employment growth slowed in
December.

“Canada is a viable alternative with stable government,
stable institutions, and a triple-A rating,” said Jack Spitz,
managing director of foreign exchange at National Bank, by phone
from Toronto. “Reserve diversification benefits Canada for
sure.”

The loonie, as the currency is known for the image of the
aquatic bird on the C$1 coin, fell 0.4 percent last week to
99.70 cents per U.S. dollar. One Canadian dollar buys $1.003.

The currency reached C$1.0447 on June 6, its low for the
year, as traders speculated that slowing economic growth would
prompt the Bank of Canada to back away from signaling higher
interest rates. The central bank maintained its tightening bias
through the year, and the currency rallied to a 13-month high of
96.33 cents on Sept. 14, as investor optimism rebounded.

Foreign Demand

Canadian government bond yields are lower for a third
consecutive year. The yield on the benchmark 10-year bond has
dropped to 1.77 percent from 1.94 percent at the end of 2011.

Foreigners bought the largest amount of Canadian debt in 10
years in October, adding C$8.15 billion ($8.18 billion) of
government bonds and C$8.93 billion of private corporate debt.
The purchases furthered a rally in the country’s bonds that have
pushed yields to record lows, reaching 2.22 percent on June 1,
according to Bank of America Merrill Lynch Canada Broad Market
Index data that dates back to 1992.

The loonie’s performance against the U.S. dollar has also
beaten that of its fellow commodity currency, the Australian
dollar, even as Canada’s main export, crude oil is set for its
first annual drop since 2008, when Lehman Brothers Holdings Inc.
collapsed and sparked a global financial crisis.

“Canada is very well diversified in terms of having the
safe havens, metals, energy and the solid financial
institutions, that is a very rare commodity in today’s world,”
said Alfonzo Esparza, senior currency analyst at online currency
exchange Oanda Corp. by phone from Toronto.

Growth Outlook

Canada’s banking system was ranked the world’s soundest for
a fifth consecutive year in September by the Geneva-based World
Economic Forum. Even after outperforming the bank debt of other
nations last year, demand has diminished with Canadian lenders
saying consumer banking profit will fall as individuals pare
household debt and policy makers push measures to keep the
housing market from overheating.

Canada’s economy has shown signs of slowing lately and its
currency has fallen 1.26 percent versus the U.S. dollar this
quarter. Canadian gross domestic product is expected to fall to
1.8 percent next year from a projected 2 percent this year,
according to the median forecast in a Bloomberg survey of 29
economists.

“Nobody is expecting for Canada to break out suddenly, but
it’s sort of steady growth, dependable, so I think that’s kind
of the story that’s been getting some traction,” Esparza said.
“This year solidified the Canadian dollar as a safe haven.”